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Ford Motor Company (F) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Ford Motor Company (F) Q2 2013 Earnings Conference Call July 24, 2013 9:00 AM ET


Alan R. Mulally - President and CEO

Robert L. Shanks - EVP and CFO

Mark Fields - COO

Stuart Rowley - Corporate Controller

Neil Schloss - Corporate Treasurer

Paul Andonian - Director of Accounting

Mike Seneski - Ford Credit CFO

George Sharp - Executive Director, IR


Colin Langan - UBS

Patrick Archambault - Goldman Sachs

Rod Lache - Deutsche Bank Securities

John Murphy - Bank of America Merrill Lynch

Brian Johnson - Barclays Capital

Adam Jonas – Morgan Stanley

Matt Silver – Guggenheim

Craig Trudell - Bloomberg News

Vipal Monga - Wall Street Journal

Deepa Seetharaman - Thomson Reuters

Nathan Bomey - Detroit Free Press

Mike Ramsey - Wall Street Journal

Karl Henkel - The Detroit News


Good day, ladies and gentlemen, and welcome to the Second Quarter Ford Motor Company Earnings Conference Call. My name is Katrina and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’ll now like to turn the presentation over to your host for today Mr. George Sharp, Executive Director of Investor Relations. Please proceed.

George Sharp

Thank you, Katrina, and good morning. Welcome to everyone joining us today either by phone or webcast. On behalf of the entire Ford management team I’d like to thank you for taking the time to be with us this morning so we can provide you with additional details of our second quarter 2013 financial results.

Presenting today are Alan Mulally, President and CEO of Ford Motor; and Bob Shanks, Chief Financial Officer. Also participating are Mark Fields, Chief Operating Officer; Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit CFO.

Now copies of this morning’s press release and presentation slides are available on Ford’s investor and media website. Please note that the financial results discussed today are preliminary and include references to non-GAAP financial measures. Final data will be included in our Form 10-Q and a non-GAAP financial measures are reconciled to the U.S. GAAP equivalent in the appendix of the slide deck.

Finally, today’s presentation includes some forward-looking statements about our expectations for Ford’s future performance. Of course, actual results could be different. The most significant factors that could affect future results are summarized at the end of this presentation and detailed in our SEC filings.

With that, I’d like to turn the presentation over to Alan Mulally.

Alan R. Mulally

Thank you, George, and good morning. We are pleased to review our second quarter performance and the progress we continue to make in delivering our One Ford Plan. Let’s turn to the first slide please.

Our One Ford Plan depicted here remains the foundation for everything we do. Across the Ford Enterprise we continue to aggressively restructure the business to operate profitability at the current demand and changing model mix, accelerate development of new products our customers want and value; finance our plan and continually improve our balance sheet and work together effectively as one team leveraging our global assets.

Our goal is to serve customers in all markets with a full family of best-in-class vehicles, small, medium and large cars, utilities and trucks, delivering profitable growth for all. No place is as better represented than in China, where execution of the One Ford Plan is well underway with growing evidence of our success demonstrated in our results.

As shown here on slide 2, our product portfolio is rapidly expanding in China. With five new segment launches in 2013, we’re nearly doubling our lineup by year-end and we continue to freshen our showrooms with three all new or refreshed products. Our dealer network in China is also expanding to serve our customers. We’re on track to grow from about 600 dealer outlets at the end of 2012 to more than 900 by 2015.

Strong sales of our new products grow significant market share improvements in China, stay in their record quarterly market share of 4.3% in the second quarter. In fact, our market share in China improved seven times representing its point from the first quarter and was up 1.5 percentage points from the same period last year.

To meet the growing demand for Ford vehicles in China, Changan Ford one of our joint ventures, opened a new engine plant last month in Chongqing, more than doubling Changan Ford’s annual engine capacity. The plant initially will produce the award winning 1.0-liter EcoBoost engine with our turbo charged direct injection three cylinder engine, recently named international engine of the year for the second year running as well as a 1.5-liter naturally aspirated four-cylinder engine.

Also in June, JMC another of our joint ventures, opened a new commercial vehicle assembly plant in Nanchang. This new highly flexible production facility more that doubles JMC’s annual capacity. We also announced plans to bring two new global products to JMC, an all new Ford commercial vehicle in all new Ford SUV. With the launch of these products, Ford will have a full portfolio of vehicles in China, delivering on our plan to introduce 15 new vehicles in China by 2015.

Let’s now turn from the exciting progress we’re making in China to our second quarter results. We’ll start on slide 3, with a summary of our accomplishments. The Company had an outstanding second quarter, earning operating profit of $2.6 billion, our 16th consecutive profitable quarter.

Automotive operating related cash flow was very strong at $3.3 billion, and quarterly end liquidity exceeded $37 billion. The top line has showed double-digit percentage gains in year-over-year growth in both wholesale volume and total company revenue, supported by market share gains in all regions around the world.

Among our business units, both North America and Asia Pacific had record results. In North America we had a highest second quarter and first half pre-tax results, and in Asia Pacific and Africa, we achieved our best pre-tax profit of any quarter. Ford credit, once again delivered solid performance and South America returned to profitability. Europe incurred a loss, but it was improved compared with both a year-ago and the first quarter, as we continue to execute our transformation plan leading to profitability by mid-decade.

Total automotive operating margin at 6.4%, improved 1.5 percentage points from 2012 with all regions contributing to our strong performance. Today we’re improving our full-year Company financial guidance. We now expect total Company pre-tax profit to be about equal to or higher than 2012. In automotive operating margin to be about equal to 2012. We also now expect automotive operating related cash flow to be substantially higher than last year.

Before turning to the financial details, let’s recap several other noteworthy achievements from the second quarter. As shown on Slide 4, we launched a number of products around the globe, including the refreshed Fiesta in the U.S., Brazil, and Argentina; the Tourneo Custom in Russia; the Fiesta ST in South Africa and China; the EcoSport in India; and the 1.5-liter EcoBoost in Asia Pacific and Africa.

In Russia, we started full production of Explorer in our Elabuga Assembly Plant. At the Shanghai Motor Show we introduced the Escort Concept indicating our future direction to meet the preferences of Chinese customers. We announced investment in two new engine plants, one in China at JMC and another in Russia at our Ford Sollers joint venture.

In Australia we announced the transformation of our business with plants discontinued domestic manufacturing in 2016 and serve our customers with an exciting lineup of products from around the Ford world. Meanwhile in the U.S., we celebrated the sale of more hybrid vehicles in the first five months of the year than we had sold previously in any full year.

Finally, in North America we announced the addition of over 2,000 jobs in Kansas City to support higher F-Series demand and launch of the Ford Transit. This addition along with 1,400 jobs to be added at our Flat Rock Assembly Plant enabled an increase in the straight-time capacity of 200,000 units annually to meet demand. We're also announcing the reduced summer shutdown throughout North America.

Bob Shanks will now take us through the details of our financial performance in the quarter. Bob?

Robert L. Shanks

Thanks, Alan, and good morning everyone. I'm very pleased to be able to share our second quarter results with you today. Second quarter wholesale volume was 1.7 million units, up 231,000 units or 16% from a year ago and revenue at $38.1 billion was up $4.8 billion or 15%.

Pre-tax profit was $2.6 billion, excluding special items, $726 million higher than a year ago and our after-tax earnings per share at $0.45 were $0.15 higher. Net income attributable to Ford including unfavorable pre-tax special items of $736 million was $1.2 billion, $193 million higher than a year ago.

Earnings were $0.30 a share, up $0.04. Special items in the second quarter included $442 million for separation-related actions, primarily in Europe and $294 million associated with our U.S. salary retiree voluntary lump sum payout program. You can find additional detail on these special items in Appendix 3.

Automotive operating-related cash flow was $3.3 billion marking the 13th consecutive quarter of positive performance. Automotive growth cash improved to $25.7 billion exceeding debt by $9.9 billion. Our second quarter operating effective tax rate which isn't shown was 32% consistent with prior guidance. We continue to expect our full year operating effective tax rate to be similar to 2012, which was 32%.

In the first half, vehicle wholesales and revenue increased by about 13% from a year ago and first half pre-tax operating profit, excluding special items, was $4.7 billion, a $579 million improvement. Net income was $2.8 billion, $408 million higher than a year ago.

As shown on slide 6, both of our sectors, automotive and financial services, contributed to the total company's second quarter pre-tax profit of $2.6 billion. And as shown in the memo below the chart, profit improved $726 million from a year ago driven primarily by the automotive sector. Compared with first quarter 2013, total company pre-tax profit improved $409 million reflecting higher automotive profit.

The key market factors and financial metrics for our total automotive business are shown on slide 7. The strong automotive performance reflects continued outstanding performance in North America, recovery in South America from the exchange-driven loss in the first quarter, great progress in Europe and continuing to deliver our transformation plan and as noted, the best ever quarterly profit in Asia-Pacific, Africa.

As already mentioned, total automotive second quarter wholesale volume and revenue were both up strongly from a year ago. The higher volume reflects improved market share in all regions and higher industry volume in all regions except Europe, as well as lower dealer stock reduction this year compared with the year ago.

The growth in revenue reflects higher volume in all regions and net pricing gains everywhere except Europe, offset partially by unfavorable exchange in all regions. Automotive pre-tax profit was $2.1 billion, up $722 million from the year ago, more than explained by favorable market factors and that's volume, mix and net pricing.

Operating margin at 6.4% was 1.5 percentage points higher reflecting mainly favorable market factors. As shown in the memo below the chart, first half volume and revenue were both 13% higher than a year ago and total automotive first half pre-tax profit at $3.7 billion and operating margin at 5.8% also were both higher.

The $700 million increase in total automotive second quarter pre-tax profit compared with 2012 as explained by the causal factors shown on slide 8. The improvement reflects favorable market factors across all regions, offset partially by higher cost and unfavorable exchange primarily in South America.

The cost increases mainly reflect investments in higher volume, growth and new products for this year and the future, as well as restructuring-related costs in Europe and higher pension in OPEB expense in North America and Europe. As shown in the memo, pre-tax profit was $0.5 billion higher than first quarter, more than explained by favorable volume and mix and exchange. You can find more details on the quarter-to-quarter change in Appendix 8.

Our second quarter pre-tax results for each of our automotive operations as well as other automotive are shown on slide 9. All regions were profitable except Europe and they all improved compared with the year ago. In addition, the regions outside North America achieved the best combined results since second quarter 2011.

Other automotive reflects net interest expense offset partially by a favorable fair market value adjustment on our investment in Mazda. For the full year we now expect automotive net interest expense to total about $800 million to $850 million. This is up from our prior guidance of $750 million to $800 million, primarily due to the impact of rising interest rates on the market value of our cash investments portfolio.

Now we'll look at each of the regions within the automotive sectors starting on slide 10 with North America. North America continued to perform very well achieving a pre-tax profit of $2 billion or more and an operating margin of 10% or more for the fifth time of the last six quarters.

In the second quarter, this reflects improving industry sales and a healthy full-size pickup segment, our strong product lineup, U.S. market share growth including strong growth in the East and West Coast markets, continued discipline in matching production to real demand and a lean cost structure, even as we invest more in product and capacity for future growth.

As you can see on the first two graphs on the left, North America grew strongly in the second quarter with wholesale volume and revenue each 14% higher than a year ago. The higher volume drove the revenue increase. The volume improvement mainly reflects higher U.S. industry sales increasing from SAAR of 14.5 million to 15.7 million units and the higher U.S. market share.

North America pre-tax profit was $2.3 billion, $390 million higher than a year ago and operating margin at 10.4% also was higher. Favorable market factors more than account for the improvement in both metrics. As shown in the memo below the chart, North America first half, pre-tax profit was $4.7 billion, a first half record, and operating margin was 10.7%, about the same as the year ago. Volume and revenue were both about 16% higher than the same period a year ago.

On slide 11, we show in more detail the causal factors that drove the $300 million improvement in North America second quarter pre-tax profit. As mentioned, the improvement was driven by favorable market factors offset partially by higher costs, including investment and new products and growth. As shown in the memo, pre-tax profit decreased by $100 million compared with first quarter, more than explained by higher costs.

Ford U.S. market share trends are shown on slide 12. Total U.S. market share increased in the second quarter compared with last year and the prior quarter. Retail share of the retail industry also improved from the year ago but was down from the prior quarter. Starting on the left, our total market share was 16.5%, up nine-tenths of a percentage point from the same period last year, reflecting robust F-Series sales and strong sales of the all new C-MAX and Escape.

Our share was up six-tenth of a percentage point from first quarter 2013 reflecting stronger demand for small cars and E-Series vans from our fleet customers and the higher retail sales of Lincoln MKZ and Escape. As shown on the right, our retail market share of the retail industry was 13.7% up 9/10 of a percentage point from last year reflecting increases in F-series, small cars, Escape and MKZ. This includes favorable market segmentation for full-size pickups and mid-size premium cars. Our retail market share declined from first quarter reflecting primarily lower dealer inventory of some products including Fusion and Explorer. We expect to address these constraints in the second half with the launch of Fusion at our Flat Rock assembly plant and an increase in Explorer capacity at our Chicago facility. Now turning to our full-year guidance for North America, it remains unchanged. We continue to expect higher pre-tax profit compared with last year, and an operating margin of about 10%.

Let’s turn now to slide 13, and talk about South America. In South America we’re continuing to execute our strategy of expanding our product lineup while progressively replacing legacy products with global ONE FORD offerings. Customer response to the new Ranger pickup has been strong while the all new EcoSport and Fusion are segment leaders. The recently refreshed Fiesta is also launched to a strong start. In the second quarter wholesale volume and revenue increased from a year ago by 24% and 28% respectively. The higher volume reflects favorable changes in dealer stocks, higher industry sales which increased from a SAAR of 5.3 million to 5.8 million units and higher market share. The market share increased from 9.4% to 9.6% with more than explained by strong sales of EcoSport.

South America’s growth in revenue were driven mainly by higher volume from new products and that pricing gains offset partially by unfavorable exchange. Pre-tax profit was $151 million and the operating margin was 5%. The year-over-year improvement in both metrics is more than explained by a favorable volume in mix and net pricing gain. As shown in the memo below the chart, South America first half loss was $67 million which is more than explained by the impact of the devaluation of the Venezuela and Bolivar in the first quarter. Volume and revenue were higher than last year.

On slide 14 we show more detail behind the $146 million increase in South America’s second quarter pre-tax results. As mentioned our new products are gaining momentum and contributed the favorable mix and higher net pricing in the second quarter. Higher costs and unfavorable exchange were partial offsets. As shown in the memo pre-tax results were $369 million better than first quarter explained primarily by favorable market factors and exchange offset partially by higher cost. Our full-year guidance for South America remains unchanged. We continue to expect results to be about breakeven in an environment that remains challenging across the continent.

Let’s turn now to Europe beginning on slide 15. As we’ll discuss in more detail shortly Europe is well on track in executing our transformation plan focused on product, brand and cost. In the second quarter Europe’s wholesale volume and revenue each improved about 8% from a year ago. The volume increased primarily reflects non-repeat of dealer stock reductions incurred in 2012 and higher market share. Lower industry volume was a partial offset. The SAAR declined from 14.4 million units a year ago to 13.6 million units this year. Europe’s market share improved 5/10 of a percentage point from 7.6% to 8.1% more than explained by higher share of the retail market. The increase in Europe’s revenue mainly reflects the higher volume. The pre-tax loss for Europe was $348 million and the operating margin was a negative 4.6%, both improved from a year ago despite the lower industry and the restructuring cost associated with our transformation plan. As shown in the memo below the chart, Europe’s first half loss was $810 million and operating margin was negative 5.7%, both worse than a year ago more than explained by $291 million from restructuring costs. Volume and revenue were about equal compared with last year.

Slide 16 shows more detail of the causal factors that drove the $56 million improvement in Europe’s second quarter pre-tax results from a year ago. The improvement is more than explained by a favorable volume in mix offset partially by higher structural cost mainly accelerated depreciation and a non-recurring write-off related to facilities we plan to close. The memo on the right side of the slide shows the restructuring related cost that are included in our operating results. Personnel separation related costs which were significant this quarter are captured in special items. As show in the memo below the chart pre-tax results improved $114 million compared with first quarter mainly due to favorable volume and mix.

Slide 17, which is new this quarter shows total market share for the 19 Europe markets we track as well as passenger car retail market share of the retail industry for the five major European markets, and these five major European markets represent about 75% of the 19 markets. Starting on the left, our total market share was 8.1% up 5/10 of a percentage point from the same period last year more than explained by strong sales of the all new V-Max and improvements by Transit, Kuga and Ranger. The share also was a 4/10 of a percentage point from first quarter. A key element of our European transformation plan is to focus on retail sales and to reduce reliance on short cycle rental and dealer self-registration units. This is key to our brand health, residual values and margins.

As shown in the right hand chart, our strategy is working. Our share of the retail segment of the five major European markets grew to 8.3% in the first quarter and 8.4% in the second quarter nearly two percentage points better than the same period last year. This improvement has been underpinned by the strong retail performance of our all new V-Max and Fiesta as well as retail share gains for Focus. Consistent with our strategy dealer stock day supply of new vehicles at the end of the second quarter have been reduced in line with our plan and stocks of dealer self-registered vehicles have been reduced by about 2/3 compared with prior-year. Going into the third quarter our retail order banks are very healthy and about 50% higher than prior-year in a down market.

The slide 18 shows, we continue to progress in delivering our European transformation plan. Our product acceleration remains on track with the introduction now of five new passenger and two new commercial vehicles through June. Due in part to the strength of our new products as already noted our retail share improved sharply in the second quarter and our fleet share also improved 4/10 of a percentage point. Internal data also suggest we’re improving quality and the perception on the Ford brand and the region as well. We continue to make progress on cost too including our plan to close three facilities and relocate production for a more efficient manufacturing footprint. Our Southampton Assembly plant and Dagenham Stamping and Tooling operations will close at the end of this week and we’ve completed the consultation process with the unions at our Genk, Belgium plant which is scheduled to close at the end of next year.

As mentioned earlier, special items in the second quarter shown in Appendix three include $442 million for world-wide separation related actions of which $419 million was related to separation cost per personnel at the Genk and U.K. facilities as part of our transformation plan. The total of these separation cost is estimated at about $1.2 billion all of which we expect to incur by year end 2014 with about $800 million we recognized this year including the $400 million I just mentioned for the second quarter.

Now in terms of our full-year guidance for Europe we now expect our loss to be about the same as the year ago or about $1.8 billion. This compares to our prior guidance of a loss of about $2 billion. While the outlook for the business environment in Europe continues to be uncertain, data trend suggest that economic and industry conditions may have begun to stabilize.

Let’s now turn to Asia Pacific, Africa on Slide 19. Our strategy in Asia Pacific, Africa is straight forward, to aggressively grow with an expanding portfolio of global ONE FORD products tailored for the region with manufacturing hubs in China and India and in ASEAN. Implementation of the strategy is fairly gaining momentum. As shown on the left second quarter wholesale volume was up 27% from a year ago and net revenue which excludes our China joint ventures grew 35%. The higher volume reflects mainly higher market share as well as stronger industry sales which increased from a SAAR of 33.4 million units to 35.4 million. Unfavorable changes in dealer stocks were a partial offset. Second quarter market share in the region was 3.6%, one full percentage point higher than a year ago and a quarterly record. The 38% improvement was driven by China which isn't shown where our market share improved as Alan mentioned by 1.5 percentage point to a quarterly record of 4.3% reflecting mainly strong sales of the new Focus, Kuga, and EcoSport. Asia-Pacific, Africa's higher revenue primarily reflects favorable volume and mix.

Pre-tax profit at $177 million was in any quarter record and operating margin was 5.8% both improved from last year due to favorable market factors. This was also the regions fourth consecutive quarterly profit. As shown in the memo below the chart, Asia-Pacific, Africa first half profit was $183 million with an operating margin of 3.2% both higher than a year ago. Volume and revenue also increased.

The $243 million improvement from a year ago in Asia-Pacific, Africa second quarter pre-tax results is explained by casual factor on slide 20. As we've seen in past quarters, top line related factors were favorable offset partially by higher costs as we continue to invest for future growth as well as unfavorable exchange. We also benefited from higher royalties, parts and accessories profits as well as an insurance recovery all included in other.

As shown in the memo, Asia-Pacific, Africa pre-tax results were $171 million higher than first quarter 2013 more than explained by favorable volume and mix. Given the strong first half performance and the momentum demonstrated by our business in the region, we now expect Asia-Pacific, Africa to be profitable for the full year.

Turning now to Ford Credit, slide 21 shows the $16 million increase in second quarter pre-tax results compared with the year-ago by causal factor. The results are more than explained by higher receivables and financing margin, offset partially by lower credit loss reserve reductions. As shown in the memo, Ford Credit's pre-tax results decreased by $53 million compared with first quarter due to unfavorable mark-to-market on the derivative portfolio and seasonal insurance losses.

Ford Credit remains key to our global growth strategy providing world class dealer and customer financial services, maintaining a strong balance sheet and producing solid profits and distributions. For the full year, Ford Credit continues to expect pre-tax profits to be about the same as last year and distributions to the parent of about $200 million. Ford Credit now expects year-end managed receivables to range between $97 billion and $102 billion which is within our prior range of $95 billion to $105 billion.

Next on slide 22 as our automotive gross cash and operating related cash flow, as you can see here automotive gross cash at the end of the quarter was $25.7 billion, an increase of $1.5 billion from the end of the first quarter. Automotive operating related cash flow was $3.3 billion driven primarily by automotive profits of $2.1 billion and favorable timing differences of $1.2 billion.

During the quarter, we contributed $1 billion to our worldwide funded pension plans which included about $800 million of discretionary payments to our U.S. funded plans in line with our long-term pension derisking strategy. Dividends paid in the quarter totaled about $400 million and we continued our compensation-related share repurchase program.

In the first half, our operating related cash flow was $4 billion and gross cash improved $1.4 billion. We now expect automotive operating related cash flow to be substantially higher than it was in 2012 which compares to our prior guidance of simply higher which was $3.4 billion in 2012.

Now we'll summarize our automotive sector cash and debt position at the end of the quarter which is captured on slide 23. Automotive debt at the end of the quarter totaled $15.8 billion which was $200 million lower than first quarter. In April, we took advantage of favorable market conditions by increasing our revolving credit facility from $9.3 billion to $10.7 billion and extending this maturity from November 2015 to November 2017. We entered the quarter with net cash of $9.9 billion and liquidity of $37.1 billion.

We'd now like to provide on slide 24 a special update on our pension derisking strategy. In the first half, we contributed $2.8 billion to our global funded pension plans including $2 billion in discretionary contributions to our U.S. plans. For the full year, we continue to expect contributions of $5 billion to our global funded plans including about $3.5 billion in discretionary contributions.

In the second quarter we settled $1.5 billion of obligations related to the U.S. salary retiree voluntary lump sum program with $2.7 billion settled since the inception of the program last year. As a result of the second quarter settlement, we recognized a special item charge of $294 million reflecting the acceleration of unrecognized losses in the plan. The lump sum program now is about 60% complete based on obligations and concludes by year end.

Also we've continued to progressively improve the mix of fixed income assets to our plans portfolios with the objective of reducing funded status volatility. As a result of the strategic actions we've been taking along with recent increases in discount rates, the funded status of our global funded pension plans significantly improved as of June 30 compared with the end of last year. As usual we'll provide a full update at the end of the year.

Now with that, I'd like to turn it back to Alan who'll take us through our outlook for the business environment as well as an update of our 2013 planning assumptions and key metrics.

Alan R. Mulally

Thank you, Bob. Summarize on slide 25 is our view of the business environment going forward. Overall, our outlook has not changed substantially. We project 2013 global GDP growth to be at the lower end of the 2% to 3% range. Global industry sales are projected at the higher end of an 80 million to 85 million unit range.

U.S. economic growth is expected to be in a 2.5% range with industry sales supported by continuing improvement in the housing sector and replacement demand as a result of the older age of vehicles on the road. In South America, recent developments in Brazil add uncertainty to the near-term outlook while in Argentina and Venezuela; there are escalated risks as both economies are weak with an unclear economic policy direction.

The Euro Area is in recession but incoming data suggests that economic and industry conditions may have begun to stabilize. Recent policy decisions such as the European Central Bank's rate cut and the European Union's extension of deficit targets for some markets are positive steps.

In Asia Pacific and Africa, economic indicators point towards growth in the 7% to 8% range in China this year. Growth in India on the other hand is below its full potential due partially to high inflation and interest rates. Overall, despite challenges we expect global growth to continue for 2013.

Our guidance for 2013 is detailed here on slide 26. We now expect full year industry volume to range from 15.5 million to 16 million units in the U.S., Europe to be at the higher end of 13 million to 13.5 million unit range and China to range from 20.5 million to 21.5 million units.

We project our full year market share to increase over 2012 in the U.S. and China and to be about equal to last year in Europe. But we expect our retail share of the retail market in Europe to improve.

Our total company second quarter production volume shown in Appendix 5 was about 1.7 million units, 218,000 units higher than a year ago, reflecting higher volumes in all regions. We expect total company third quarter production volume to be about $1.6 million, up 195,000 units from a year ago, also reflecting higher volumes in all regions. The outlook for quality is now mixed as we expect performance in North America, South America and Asia-Pacific to be about the same as last year but Europe to be better.

In terms of our financial performance, we now expect total company pre-tax profit to be about equal or higher than 2012, automotive operating margin to be about equal to 2012 and automotive operating related cash flow to be substantially higher than 2012 including capital spending of about $7 billion to support our industry leading product refresh rates, expansion of our portfolio in an absolute sense and across the regions and capacity actions. Overall, 2013 is proving to be another strong year for the Ford Motor Company as we continue to work towards our mid decade outlook.

In closing, our One Ford Plan is built on a compelling vision, comprehensive strategy and relentless implementation. As the results we have announced today make clear our One Ford Plan continues to deliver profitable growth around the world and we are absolutely focused on building great products, creating a stronger business and continue to contribute to a better world. We achieved outstanding results in the second quarter and we continue to expect strong results for the full-year. This includes continued strength from North America, delivery of global products in the South America for product led growth and the remainder – for the remainder of the year, even as we work to adjust to an uncertain economic environment in the region. Continued successful execution of our transformation plan for Europe for which many proof points are evident and which is proceeding as planned as we work to return to profitability by mid-decade.

Strong investment for the long-term success in Asia Pacific and Africa, which is already beginning – being reflected in improved revenue, market share and financial results and consistent performance from our valued Ford Credit operations, which delivers a world class customer service and solid bottom line results.

Now we’d be delighted to take your questions. George?

George Sharp

Thanks, Alan. Now we’ll open the lines for about a 45 minute Q&A session. We’ll begin with questions from the investment community then take questions from the media. In order to allow as many questions as possible, please keep your questions brief. Katrina, can we have the first question please?

Earnings Call Part 2: